Mortgage Giant Places Bets Against Homeowners

Freddie Mac is a gatekeeper in the mortgage market. In many cases, the taxpayer-owned mortgage company controls who qualifies to refinance a mortgage and who doesn't. Well, NPR has learned that Freddie Mac has been making financial wagers, betting against American homeowners being able to refinance. And now some lawmakers want to put a stop to it. NPR's Chris Arnold has been reporting this story in partnership with ProPublica.org. He has this report.

CHRIS ARNOLD, BYLINE: A home loan has two payment streams: the more stable principal payments and the interest payments. Freddie Mac here has tied up billions of dollars on investments that isolate just those interest rate payments. So that means that if somebody refinances, they stop paying Freddie Mac anything, and Freddie loses money. Freddie Mac has also been making it harder for Americans to refinance through tighter rules and higher fees. No evidence has emerged that these two actions have been coordinated, but the trades raised concerns.

SENATOR ROBERT CASEY, JR.: I was outraged that this basic conflict of interest existed.

ARNOLD: That's Democratic Senator Bob Casey from Pennsylvania. He sent a letter to President Obama today asking him to direct Freddie Mac to put an end to these practices immediately. And Casey says he supports legislation to direct Fannie and Freddie to allow millions more people to refinance.

JR.: There are a lot of families out there that can benefit tremendously from a policy that encourages and gives more opportunities for refinancing.

CHRIS MAYER: There are tens of millions of Americans who are paying too much for their mortgages.

ARNOLD: That's Chris Mayer, an economist at Columbia University, who for years now has been pushing for what's termed a mass refi program.

MAYER: A widespread refinancing program would have many benefits, not only helping the economy and putting tens of billions of dollars of money back in consumers' pockets, the equivalent of a very long term tax cut, but it also is likely to reduce foreclosures.

ARNOLD: Scott Simon heads up mortgage securities trading for the giant bond investment fund, PIMCO. He says he was shocked by Freddie Mac's investments. Simon says the investments are risky and they give the company an incentive against large scale refinancings.

SCOTT SIMON: If there was a mass refi program, the bets they made would get absolutely wiped out. The way these bets do the best is if the homeowner is barred from refinancing.

ARNOLD: Freddie Mac is now controlled by its regulator, the Federal Housing Finance Agency. The FHFA late today said in a statement that Freddie is not doing anymore of these controversial trades, but it acknowledged that Freddie Mac still holds $5 billion worth of these bets. Freddie Mac says it refinanced loans for hundreds of thousands of borrowers last year and says that there is a firewall between its investments and its lending policies.

But, economist Chris Mayer says...

MAYER: It's really outrageous, the idea that three years into the crisis, under government conservatorship, that the government would allow this kind of behavior to occur.

ARNOLD: Freddie Mac and other parts of the mortgage industry have been tightening credit on homeowners in recent years and no one disagrees that some of that is definitely justified. Lending standards were clearly too loose, leading up to the housing bubble. Chris Mayer thinks that the pendulum has now swung too far, but not all economists think that Fannie and Freddie should be allowing millions more Americans to refinance.

ANTHONY SANDERS: It's a cost to the taxpayer.

ARNOLD: Anthony Sanders is an economist at George Mason University. He disagrees with Chris Mayer. He thinks a mass refi program would cost taxpayers much more money than Mayer says, even setting aside these bets by Freddie Mac.

SANDERS: This means Fannie and Freddie are going to suffer even greater losses and so that's one of those public policy decisions that is very, very difficult.

ARNOLD: But when it comes to Freddie's trades, even Sanders sees a conflict there. He says his email inbox has been getting hit all day with economists and policy experts reacting.

SANDERS: Everyone is in various degrees of rage. They've been writing back saying terrible debacle by Freddie Mac.

ARNOLD: Sanders says this is further evidence that Freddie Mac and Fannie Mae should be forced to quickly sell off the large investment portfolios that they hold worth hundreds of billions of dollars.

SANDERS: They don't need these staggering Chernobyls sitting over there on both sides of the Potomac.

ARNOLD: Sanders says there are just too many potential conflicts there for regulators to keep track of. Chris Arnold, NPR News, Washington. Transcript provided by NPR, Copyright National Public Radio.